The falling copper price, now at seven month lows, should really be injecting a note of reality into the share prices of both BHP and Rio Tinto, regardless of the merger proposal. As should the big fall in zinc prices, the subprime mortgage crisis and the growing risk aversion of big investors.

The combination of falling commodity prices, the weakening Aussie dollar and the uneasy financial markets are not a deal breaker … yet.

It’s only early days but so far BHP has managed to wipe more than $10.5 billion in market value off its Australian share price since news of merger proposal emerged. BHP shares are down around $1.84 from their close last Thursday, while Rio shares are up by around $26.70: trading through a range from $135.24 to a high of $140.93 this morning. BHP shares fell.

Both BHP and Rio depend heavily on copper for earnings and even though iron ore has captured the headlines with as yet unrealised hopes of a 30% rise in the 2008 contract price, copper pricing is a real and constant variable.

Copper prices are falling because of slowing demand from China (imports fell in October) and the US, where the outlook for 2008 is depressing. And metal traders say zinc is now in oversupply, a point the country’s biggest zinc miner, Zinifex, admitted today in a statement to the ASX.

Zinifex shares have slid more than $3 or over 16% in the space of two weeks. BHP shares are not headed in that direction yet, but all it will take is for a prolonged slide in copper, oil and gold — all feasible given the worries about the US financial system — and Rio Tinto will be too expensive.

And we should keep a very close eye on what’s happening with the Aussie dollar which has fallen by around 5% in the past two days — that will benefit the mining companies by relieving the pressure on revenues and earnings if it stays around the 88USc mark.